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Refinance Student Loans Comprehensive Guide

What You’ll Find in This Guide

In this guide we will provide a basic overview of everything you’ll need to know to refinance student loans. This will include detailed discussions of the requirements to both qualify and apply for a refinance.

We will also cover the various reasons why you would want to do a student loan refinance, as well as the different types of loans and any factors you should look out for when you draft your application. Finally, we will provide you with list of lenders who specialize in the refinancing of student loans.

The guide will cover the following specific topics:

The Benefits of Refinancing Student Loans

Qualifying to Refinance Student Loans

Applying to Refinance Student Loans

Adding a Co-signer to Refinance Student Loans

How Much Student Loan Debt Can You Refinance?

Fixed vs. Variable vs. Hybrid Loan Rates

Fees to Refinance Student Loans

Refinance Deferrals and Forbearance Provisions

What to Look Out When You Refinance Student Loans

Lenders Who Offer to Refinance Student Loans

IMPORTANT: make sure to check at least 5 lenders before you choose the one to refinance your student loan with. Some lenders can provide better terms to your specific situation than those they advertise.

The Benefits of Refinancing Student Loans

Why would you want to refinance student loans?

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Consolidation of several loans. Many people accumulate multiple student loan debts during the education process. It can become cumbersome and confusing to have to deal with multiple loans. A refinance can be done as a way of consolidating several loans into one, resulting in a single monthly payment.

In fact one type of refinance, known as a consolidation, combines several loans into one, while keeping the interest rate consistent with the weighted average of the interest paid on the several loans. In this way, neither the total amount of your monthly payments nor the interest rate actually changes. The sole purpose of a consolidation is to combine several student loan debts into one. This is a typical practice when you replace many government student loans with a single government loan.

Lower interest rates. When you refinance student loans, you may qualify to get a lower interest rate. This is especially true if your credit situation has improved considerably since you took the original loans.

Longer or shorter term. When you sign on to take a student loan, the term of the loan is fixed until the loan is paid. But you might want to do a refinance either to increase the loan term, or to decrease it. If you increase the term, you will lower the monthly payments, and make the arrangement more affordable. But if your income is higher and you want to pay the loan off more quickly, you can also reduce the term.

Qualifying without a cosigner. If you have a cosigner on your current student loan, but the loan does not provide for a cosigner release, you may need to refinance the loan in order to remove your cosigner. That will be possible if you are able to qualify for the refinance based on your own financial strength.

Going from a variable rate loan to a fixed rate loan. Variable rates are attractive because they generally start out lower than fixed rates. But if interest rates rise, the rate you are paying on a variable arrangement can increase. It’s even possible that the rate on the variable will eventually rise to a level that is higher than what it is for the fixed rate. If this is a concern, you can refinance into a fixed rate loan, which would lock in your interest rate and monthly payment for the full term of the loan.

Qualifying to Refinance Student Loans

When you apply for a student loan as a student entering college, it’s understood by lenders that you have very little in the way of income, and probably even less in regard to a credit history. For this reason, lenders will generally disregard your own income and credit situation. Instead, they will require that you bring in a well-qualified cosigner, and then they will make the loan based on that cosigner’s financial strength.

But when you are looking to refinance a student loan after the fact, the lender is now looking very specifically at your credit and income profile. For that reason, they will want to see that you have at least a decent credit history, as well as an income that can largely carry the monthly payment on the refinance.

They may still allow you to use a cosigner in the event that your credit and income are deemed insufficient. But at the same time, they will want to know that you will be a major contributor to the payments, if not the primary payer and that you have the financial ability to do so.

Typical requirements to apply to refinance student loans includes the following, though there can be significant variations from one lender to another:

Completion of your education – You will generally be required to have completed your education. Some lenders may also have a specific list of approved colleges that you graduated from, or even specific major fields of study.

Citizenship – You must be either a US citizen, or at least a permanent resident alien.

Credit History – Though specific credit score requirements vary from one lender to another, you will generally need to have a score that represents at least average level credit. For example, you may need a minimum credit score of 670 or even higher. And naturally, in order to have a credit score, you must have established credit over a sufficient time frame.

Employment – Some lenders will allow you to do a refinance as long as you have completed your education and have begun working in a permanent job. But many have more specific requirements. For example, a minimum requirement of at least two years of continuous employment since graduation is a common requirement. The lender will want to know that you have established a sufficient employment history so that you can make payments on the new loan. This will be especially important if you will be qualifying for the refinance based on your own resources, and not those of a cosigner.

Income – Lenders use different income requirements. Some will set a flat minimum income level. Others will require that your income supports a certain debt-to-income ratio (DTI), such as 40%, 42%, or 45%. (DTI is your total debts, including your basic housing expense and the proposed payment on your student loan refinance, divided by your gross monthly income).

Still other lenders may use a residual income method. That will mean actually compiling your income and monthly expenses, and determining how much money you have left over after all of your fixed expenses are paid. For example, they may require that you have at least $500 per month in income after paying all of your debts and your housing expense.

Generally speaking, when you apply to refinance student loans, you must qualify based on your own income alone. However, one lender – Purefy (see table below) – does allow you to qualify by including your spouse’s income. They refer to this as a “couple loan”. But once again, this practice is extremely unusual, and you should fully expect to qualify based on your own income only.

How To Refinance Your Student Loans

The actual loan application process is fairly standard, but once again there may be specific additional requirements for any given lender you apply to:

You will be required to complete a loan application, which will usually be done entirely online; this will include providing your full name, address, contact information, date of birth and Social Security number

State issued photo ID, such as a driver’s license, verifying all of the above

Diploma or transcripts indicating completion of your education – transcripts may be required if the lender considers your academic performance as one of the qualifying criteria for loan approval or pricing

Employer contact information

Income documentation, including a recent pay stub and either W-2s or fully completed income tax returns

Payoff statement(s) for any current student loan debts that you intend to include in the refinance

Evidence of your monthly housing expense

Some lenders, such as credit unions, may require you to become a member of the organization in order to secure a loan; that is usually accomplished by opening up a bank account with them

If you are using a cosigner to qualify to refinance student loans, then your cosigner will generally be required to supply similar information.

In many cases, all of the above information and documentation can be submitted directly online. But in other cases you may be required to mail in the required documents. Anytime you are going to make an application to refinance student loans, you should have the above information available in advance. That will speed the loan application process, rather than dragging it out with repeated requests for additional information.

Speaking of which, even if you supply all of the above information, the lender may still require clarifying documentation. This may be necessary in the event that there are any questions or unresolved issues in regard to either your application or your financial qualifications. You should be fully prepared to cooperate and to do so in a timely fashion.

Adding a Co-signer to Refinance Student Loans

The most important thing to remember when it comes to cosigners to refinance student loans is that it isn’t necessarily a cure-all. That is, the use of a cosigner can only be done to strengthen a relatively weak application, but it cannot be used in order for you to get a loan that you otherwise would not qualify for.

When it comes to refinances, lenders fully expect that you, as the primary borrower, will be sufficiently qualified for the loan based on your own financial resources. In practical terms, this means that while the lender will look at both your credit profile and income and that of the cosigner, the ultimate focus will still be on you individually.

For this reason, you will need to have an acceptable credit score. A lender may permit you to bring a cosigner with strong credit to the loan, but only if you have a reasonable credit score yourself – say between 650 and 699. They will not permit the use of a cosigner in a situation where your own credit score is say, 579.

The situation is similar with income. For example, while lenders may have a minimum combined credit level that applies to both you and your cosigner, they will also have a secondary minimum that applies to you alone as the primary borrower. While the lender may require a minimum combined annual income of $50,000, they may also require that you, as the primary borrower, have a minimum income of $30,000.

More specifically, they will want to be sure that you can actually carry the monthly payment on the refinance based on your own income. For that reason, even if you add a high income cosigner to the loan application, the lender may still reject the new loan based on the fact that you will be unlikely to be able to make the payment without regular direct aid from the cosigner.

Once again, this is completely unlike the cosigner situation that applies when you are taking student loans as a new or current student. In that situation, lenders will generally allow you to qualify for the loan based mostly or entirely on your cosigner’s financial strength. This is not the case when it comes to refinances.

Consequences of late payments or default. It’s important to understand that if you are using a cosigner to help you refinance student loans, your payment performance on the loan will affect your cosigner’s credit. Any late payments that you make on the loan will be reflected on your cosigner’s credit report. And should you default on the loan, not only will the default also appear on your cosigner’s credit report, but the lender will then pursue your cosigner for full payment. You should think carefully about your ability to meet your obligation on the loan in light of the impact that will have on your cosigner’s credit report and credit scores.

Co-signer release option. Most private student lenders – but certainly not all – do provide a cosigner release from the loan. In most cases between 24 and 48 consecutive on-time monthly payments must be completed. But you must also demonstrate that you are able to handle the payments in the future based on your own income and credit history Please keep in mind that while many lenders will release the cosigner, not all will. Some will require the cosigner to remain on the loan until it is fully paid,

How Much Student Loan Debt Can You Refinance?

When you refinance student loans you can typically borrow anywhere from a few thousand dollars up to as much as $500,000, though the maximum amount will vary with each lender.

But apart from how much a lender is willing to provide for your refinance, you will nonetheless be limited by your ability to qualify for the loan that you want. For example, the lender may have a maximum loan amount of $150,000, but if you’re only able to qualify for $95,000 based on your income and credit history, then $95,000 will be the most you can borrow.

Some lenders may also have two loan limits – one is the amount of student loan debt that you are allowed to have overall, and the second is the maximum amount that they will lend to you. In this situation, for example, while they may permit a maximum level of student loan indebtedness of $160,000, they may restrict the portion of that total debt that they will hold on a refinance to no more than $120,000.

As to typical loan terms, most lenders offer terms ranging from as little as five years to as long as 20 years.

Fixed vs. Variable vs. Hybrid Loan Rates

Fixed rates provide a constant interest rate over the full-term of your loan. This is the most stable type of refinance, since not only is your interest rate fixed for the life of the loan, but so is your monthly payment.

Fixed rate student loan refinances run from a low of 3.25% APR to a high of 11.85% APR. Exactly how much you will pay within this range will depend both on the lender you are applying with, as well as your own credit strength. Obviously, the higher your credit score is, the lower your interest rate will be.

Variable rates will change over the life of the loan. They are usually based on a common index, such as either the Prime Rate or the LIBOR rate, plus a margin added on top of the index. For example, if the Prime Rate is 3.00%, and the lender has a margin of 1.00%, then your rate will be 4.0%. Should the prime rate increase to 3.50%, then the interest rate you will pay will increase to 4.50%.

Despite the uncertainty of variable rates, they may offer the advantage that they typically run two to three points lower than fixed rates at the start. This can represent a substantial savings in interest, particularly if your loan is accumulating interest during a deferral period.

Current variable rates run from a low of 2.22% APR to a high of 9.58% APR, and will likewise depend upon the lender and your own credit score.

Hybrid rates are not offered by most student loan lenders, but there is at least one lender that does offer them. Basically, a hybrid rate loan is a combination of both a fixed rate loan and a variable rate loan. The rate will start out as a fixed rate for the first five years, and then convert to a variable rate for the balance of the loan term. If your loan is scheduled to run for 15 years, then you would be looking at a fixed rate for the first five years, followed by a variable rate for the remaining 10 years of the loan.

Fees to Refinance Student Loans

With federal student loans, you can pay an origination fee of anywhere from 1% to 4% of the loan amount to get a student loan. However, most private lenders do not charge an origination fee. In fact, the table below gives a list of private student loan lenders who not only do not charge an origination fee, but they also do not charge application fees or any other types of fees.

The absence of fees reduces the cost of the loan both upfront, as well as over the life of the loan (since upfront fees are often included in the amount of the loan, and then financed over the full-term).

Refinance Deferrals and Forbearance Provisions

Deferrals and forbearance provisions are usually more limited with student loan refinances than they are with the types of new loans that you take when you are in school. That’s largely because refinances are taken at a time when you are no longer in school, and no longer need deferrals.

In a typical refinance situation, the lender does not provide a formal deferral period. However some lenders will agree to observe deferrals and grace periods that exist with your current student loan debts. For example, if your current student loan offers a six-month grace period, and you are two months into that time frame, the new lender may provide the remaining four months of that grace period in the refinance.

Many student loan refinance lenders do offer some form of forbearance provision (the option of delaying repayment), though this is certainly not true with all lenders. Most will provide for either a reduction or temporary suspension of your monthly payments, if you have experienced a significant financial hardship.

Exactly what constitutes a hardship is defined by each lender. Most will allow it for protracted illness, or even for a prolonged time of unemployment, as long as your separation from your employer was not voluntary. Exactly how long the forbearance will last will depend upon the lender.

Typically, if your monthly payments are reduced or suspended, interest will continue to accrue on your loan balance at the agreed-upon rate. So while you will be lowering or suspending your payments, the amount that you owe on your loan will actually increase during the forbearance period. Some lenders will also provide you with assistance in securing new employment during that time.

What to Look Out for When You Refinance Student Loans

While refinancing student loans is usually a good strategy, there are a few things that you need to look out for first.

Ignoring your credit score. If you plan to apply to refinance student loans you should make a concentrated effort to maximize your credit score. This will not only improve your chance of being approved for the loan, but it will have a direct effect on the interest rate that you pay.

For example, while a credit score of 760 might get you an interest rate of 4% on a fixed rate loan, a credit score 660 might result in an 8% interest rate. If the amount of the loan is $100,000, and you are looking for a 15 year term, a 4% rate will result in a monthly payment of $760. But at 8%, the monthly payment will be $956. That will be a difference of $196 per month, or nearly $2,400 per year. Over the 15 year term of the loan, that will result in you paying an extra $36,000 in simple interest alone.

Variable interest rate increases. This type of loan can be attractive, since it carries a much lower upfront interest rate, as well as a lower monthly payment. But pay close attention to any caps on the rate. Most variable-rate loans can easily go into double digits, which would make them more expensive than the fixed rate loans you’re trying to avoid right now should rates go up significantly.

Refinancing federal student loans. Federal student loans come with certain benefits that you may need at some point during the loan term. If you refinance federal student loans into private student loans, you will lose those benefits.

Some of those benefits include:

Longer loan terms – federal student loans can run up to 25 years – and carry lower monthly payments as a result – while private student loans max out at 15 or 20 years

Public Service Loan Forgiveness (PSLF) Program – Forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer; the PSLF is available on federal loans, but not private

If you use a private loan to refinance out of federal student loans, you will lose these benefits. Think very carefully about whether or not you are in a position to give them up in favor of more favorable loan terms.

Lenders Who Offer to Refinance Student Loans

Refinancing student loans is a highly specialized type of lending. For that reason, most lenders, including banks, don’t offer these loans. But in the table below, we provide a list of lenders who do offer student loan refinances. We believe these to represent the best lenders in the student loan refinance space.

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